Private Equity Tycoon Reveals How He Turned His Company into a $90 Billion Business

Bundles of cash.

Image credit: Shutterstock

Everybody loves a good story about the American Dream, and this one’s pretty big. In a recent interview with Institutional Investor, American financier Henry Kravis gave the inside scoop on how he built one of the biggest private equity firms in the world.

It all started in 1976, when Henry Kravis and his cousin, George Roberts, decided to start their own investment company. Both men were 32 years old at the time. With limited financial resources, they each invested $10,000 into the company. Their partner, Jerome Kohlberg, was about 20 years older and was able to put $100,000 into the company.

Their strategy was to build a company with a unique workplace culture. Both Kravis and Roberts had worked for global investment bank Bear Stearns in the past, which Kravis described as being an “eat what you kill” environment. Kravis and his partners decided very early on that they didn’t want that type of culture, so they set out to design a company that was centered on active involvement and collaboration.

“We set a firm up that everyone would participate in everything we did, and that way we got everybody to work together. And today, 40 years later, that’s the same kind of culture that we have,” Kravis stated.

Being the optimists that they are, Kravis and his partners set an extremely high goal for themselves: raise $25 million. But they soon figured out that they couldn’t raise $25 million on terms that were acceptable to them. So they decided to regroup and set the bar a little lower: raise $500,000 to cover overhead costs.

“And so we said, ‘okay. Let’s go out to have a group of individuals that will put up $50,000 each for a commitment for five years, and if they put that kind of money up, we’ll show them every deal we do. They can come in or not come into the deal, but if they come in, we want 20% of the profits.’”

And that’s how KKR was born. Kravis says that to this day, neither he, Roberts, or Kohlberg have needed to put another penny into the company. With just $120,000, the three of them built the second largest private equity firm in the world, managing a total of more than $90 billion in assets.

Henry Kravis Shares Wisdom on Running a Business

Man in front of building

Henry Kravis offers some advice based on his experiences in the business world.
Image: Unsplash

Recently, KKR cofounder Henry Kravis sat down with Bloomberg to answer questions about the founding of one of the largest private equity firms today. He also talked about his experiences managing other managers and his insights and memorable moments from his career. Running a business isn’t easy, even for someone who’s been doing it for forty years, but Kravis’s wisdom could make it easier for those eager to follow in his footsteps.

Kravis has not only bought and sold companies, he’s changed the way they’re managed. Kravis and his KKR co-founders, Jerome Kohlberg and George Roberts—the other K and R, respectively—changed the landscape of finance and private equity. Pretty incredible, considering the firm started with only $120,000 in 1976.

Part of what makes this firm special is the relationship between Kravis and Roberts, who are first cousins. They’ve been close all their lives, and it’s a bond Kravis doesn’t believe any other firm has. Even when they made mistakes, Kravis and Roberts were able to come out on top, even if just for a learning experience. “We made [mistakes] together, so let’s figure out what we’re going to do. Everything we’ve ever done has been split right down the middle. It always has been, and it always will be,” Kravis says about their relationship and what makes it work like it does.

Kravis says that the most surprising thing KKR is doing now is that it’s doing so many different things. The company worked only in private equity until 2004, when they began to branch out. Now, KKR works with private, public, and capital markets. “We didn’t start off thinking we would be in the credit business. This is an evolution,” he said. The company certainly has a diverse portfolio, which includes Sundrop Farms, a sustainable tomato farm in South Australia that has the power to change the produce market considerably.

Kravis does have some sound advice for young entrepreneurs looking for their big break. “Believe in yourself, build an incredibly strong team, and focus on your company’s culture,” he says, adding, “If I can take one thing other than integrity and install that in people, I’d want it to be curiosity. Because to me, people who are curious are going to be better investors and better stewards of others’ money. If there’s no curiosity, you’re basically doing something that’s already been done by someone else.”

Happy 10th Birthday, Twitter!

Rather than be the center of discussion for global milestones, this year Twitter celebrates a milestone of its own: its tenth birthday. From a tiny IPO to a kind of leading newsroom, Twitter has seen a lot of news, a lot of changes, and a lot of headlines. Here’s a brief history of the service in honor of its anniversary as our favorite way to complain at companies and connect with one another.

Twitter is now worth more than $5 billion and climbing every day. The tweets we see today really started as a product that would turn messages into MP3s, a product which was then called Odeo. That company then became a podcasting platform, but Odeo also rose just as Apple announced that iTunes, a far more popular service, would also offer a podcasting service. Odeo’s founders began to see cracks in their foundation. So after a lot of conversation that current CEO involved Jack Dorsey, then an Odeo employee, something called “Twttr” was born. That product was honed and changed until it’s become the neat little tool we know today.

More things have happened in Twitter’s history than we can cover here, but part of why they’ve become so successful has a lot to do with how prepared they were to make an IPO, as Henry Kravis would advise. When Twitter offered its IPO in 2013, it put a lot of effort into how it moved forward: Twitter sold 70 million shares for $26 each. The IPO was generally a successful one because, compared to other IPOs like Facebook’s in 2012, Twitter’s was very small, and the IPO itself was blissfully free of technical issues. And while Twitter lost a lot of money in the months following its IPO, Twitter was ultimately able to meet investor expectations—and that’s always a good thing.

Twitter has become a key component of the social fabric not just of the United States but of the world. It’s what we use to connect to each other in times of joy and in sorrow: people were providing live updates about the 2013 bombing of the Boston Marathon, making that experience collective rather than localized. People have united in feminist hashtags like #YesAllWomen and shared amusing insights about media and art. The beauty of what Twitter has really done is that it’s opened up conversation all around the world, between every person.

Happy birthday, Twitter, and #thanksforthememories.

Is It Time to Do Away with Quarterly Earnings Reports?

earnings report

Do quarterly earnings reports bring more trouble than they’re worth? Several financiers and law firms seem to think so, and they agree that it’s time to do away with these reports altogether. Every three months when publicly-traded companies announce their earnings to the public, two things happen: People get agitated and excited over numbers and insights that may or may not be accurate; and businesses—and their investors—lose sight of any long-term profitability. Worse, people and businesses lose sight of long-term goals—and that could kill a company altogether.

Quarterly earnings reports are so problematic because they place too much importance on very small pieces of a business that are liable, and likely, to change. When so much emphasis is placed on such a short period of time, it’s easy to lose sight of the bigger picture and future trajectory, encouraging managers to take more risks than they need to when responding to disgruntled investors. Nobody wins.

Henry Kravis, co-founder of financial firm KKR, says, “I think the worst thing to happen to corporate America is quarterly earnings.” He isn’t the only one who feels that way. Law firm Wachtell, Lipton, Rosen, & Katz thinks it’s time to focus more on long-term business strategies without quarterly earnings. The firm asked that the Securities and Exchange Commission consider allowing companies in the U.S. to operate sans these reports, which they feel distract executives from long-term goals.

Getting rid of the reports, however, won’t be easy. Many analysts and shareholders depend on them; additionally, it could become harder for companies to communicate with investors.

But despite new difficulties, research could suggest that getting rid of quarterly earnings could be better for business health: Academics from London’s City University and Duke University have found that increased reporting leads to short-term thinking by managers. Firms that increase the frequency of their reports reduce spending on their long-term assets and plans.

Scrapping quarterly earnings reports all at once may not be the right solution for businesses, as the period of adjustment would likely be muddled and possibly detrimental to companies. What’s needed is decreased stress on short-term earnings. Quarterly reports can be useful for analyzing business trends, but it’s not necessary for them to carry the weight of a business alone.

You Are Your Business: Creating a Great Workplace Culture

diverse group of people all working at a table together

Keeping your new company afloat takes a lot more than free-flowing capital or strategic thinking (though those things certainly help). A company, if it’s a good one, won’t just demand great work from employees: it will actually encourage employees to do their best through a supportive, productive workplace culture. It’s necessary to what you want your company’s environment to be straight out of the gate to make sure you’re maximizing your employees’—and your business’s—potential.

Henry Kravis, who has spent decades buying, selling, and building companies, knows the value of getting the culture right. His advice to entrepreneurs setting out on their own is to believe that they are building a real business. To make sure they achieve success, Kravis encourages young companies to define their workplace cultures “as early as [they] can.” If you go into business without a good idea of who you want to be, you risk failure.

When you open your doors, make sure that your vision, mission, and strategy are clear. Because a company’s mission is largely defined by its CEO, make sure that you’re setting a good example for your team and following through with the things you say you’ll do. Furthermore, your team needs to know that they are working towards something. Don’t just describe the mission to your employees—be the mission.

Motivate your team to be supportive, transparent, and efficient. How you do this—office activities, rewards, competition—is up to you, but you need to prepare your employees to fulfill their purpose in your company. Offer managerial support and continued training for your workers so they feel engaged in their work and with each other. If your company values trust and transparency, employees will internalize that and actively contribute to the company culture.

In addition to leading by example, there are a number of other things to do that will ensure a healthy workplace environment. Hire the right staff by choosing the people you think best embody your company’s mission; make sure your employees are comfortable; encourage collaboration and social events; sit down and talk with your employees; and make sure they’re never overloaded or bored.

Creating a great office culture can be tricky, but if you are clear about what your company values and you personally demonstrate those values, you’re on your way.

Going Public? Here’s What’s Next

man speaking to audience in auditorium

So you’ve decided that the time has come for you to take your company public. You think you have the right amount of revenue and visibility, and of course investors are going to want in on what you’re selling. Even if the market isn’t great, you think now is the best time to make an IPO. If you want to take the plunge and go public, there are a few things you’re going to need to keep in mind.

First, legendary private equity expert Henry Kravis urges you not to go public unless you have a really, really good reason. His words ring especially true if your company lucky enough to be called a “unicorn,” a company with a valuation of a billion dollars or more. While Kravis understands that some companies can soar after making an IPO, many of them don’t—so proceed with caution.

If you know your company has a good reason to go public, then you can start to consider what that would look like for your company and what your team will need. Start recruiting or rounding up your best bankers, legal counsel, auditors, and stock transfer agents to help you in the IPO process. It can take a long time to find all the right people for your business, so remember to be patient. If you rush an IPO, it won’t go well.

Additionally, you’ll also need financial advisers and a solid management team. It takes a literal village to execute an IPO effectively, so don’t skimp on capable personnel.

Have your team evaluate all the obstacles you are likely to encounter. Prepare for the best, but plan for the worst, says Adam J. Epstein, author of The Perfect Corporate Board: A Handbook for Mastering the Unique Challenges of Small-Cap Companies. It doesn’t hurt to have a backup plan, especially as your company is likely to undergo many changes before the long, long road to an IPO is reached, both for your team and your business model.

Epstein says that most pre-IPO companies “tend to underestimate the time, pressure, and expense of being a public company.” Many teams lack the necessary corporate finance acumen to make the move, so train your team up with the proper skills. Then, even if you trust your team and your business’s ability to adapt, do not miscalculate what a long and expensive process making an IPO will be.

Common mistakes to avoid include outsourcing of the S-1 drafting process instead of doing it yourself, says Epstein. Don’t fail to “appreciate that public companies are graded just as much on forecasting the future as reporting the past,” and remember that you will be very closely scrutinized, both through the process and after. If you aren’t ready for that kind of critique, the time may not be as ripe as you thought to make an IPO.

But if you are ready, exercise sound judgment, flex your business acumen, and hire the right people—then you might really get somewhere.

Thinking Only Quarter to Quarter Stifles Innovation

Profit

IMG: via Shutterstock

For small businesses, thinking only from one quarter to the next is extraordinarily helpful: being able to see changes on the small scale can ensure survival or help correct problems before they become catastrophic.

But for some businesses, thinking in the short-term can be detrimental to innovation and creativity. Successful companies like Google and Amazon have the ability to think ahead—far ahead, in the case of projects like Google’s self-driving car project. Though experimentation won’t work for all companies, it does keep Google and Amazon on the front lines of innovation.

For many small businesses, looking only quarter-to-quarter seems like all that’s possible, but as companies become more successful, they have more room—and more budget—to experiment. However, because shareholders are not forgiving of the trial-and-error process, not every company should experiment with their capabilities, and certainly not before they go public, according to KKR’s Henry Kravis. Even established Wall Street firm KKR, which has begun to branch into venture capitalist investments, understands that experimentation is a delicate process that needs a lot of research and attention.

But larger companies that can afford to experiment with their innovations and company trajectory certainly make some interesting things happen. Google X, the somewhat-secret facility run by the Internet giant, encompasses a lot of projects, some of which are known, some of which are moving into becoming projects, and some of which we may not have even heard of. One of Google’s most innovative projects is its intent to create cars that drive themselves, which has recently moved from an idea stage to actual experimentation involving prototypes.

Like Google, Amazon is also working on some creative projects that could significantly change the way mail is delivered. Amazon Prime Air, so far still in its embryonic stages, is a service that will deliver mail and packages by drone. The project is innovative and would likely be efficient, but it faces the stern countenance of public opinion on the drones, which could be hazardous if not engineered correctly.

There is no guarantee that the program, or Google’s self-driving car initiative, will work: both projects carry the heavy risk of failure, but they are potential failures big companies like these are likely to withstand. Even if shareholders can hold a grudge, they are more willing to take chances on large companies than they are on small ones.

Shareholders of Google and Amazon will probably still see profit even if these ambitious projects tank. But they have a long and sturdy record of measurable progress, so their futures are relatively secure, or at least secure enough that their scopes are not limited to quarter-to-quarter activity.

It’s hard for small businesses who lack the kind of revenue garnered by Google or Amazon to think years into their futures or to tackle ambitious progress where success is not guaranteed. Thinking only from one quarter to the next has its own benefits, of course, but for the larger companies that have the resources, being able to think ahead for the long-term might yield some truly astounding innovations.

KKR Looking to Entice Smaller Investors

Invest

Get out your piggy bank, now is the time to invest. IMG: via Shutterstock.

In a new U.S. Securities and Exchange Commission filing, KKR, the private equity firm led by George Roberts and Henry Kravis, is allowing smaller investors to contribute with as little as $10,000. Previously, the Carlyle Group, a chief competitor with KKR, allowed smaller investors to pledge as little as $50,000 beginning in 2013.

To be able to contribute, an investor must have a net worth of more than $1 million, which can’t include their primary residence. Generally, most firms include those who have at least $5 million in investments. Traditionally, both firms have relied on public and corporate pension funds for the majority of their capital. In recent years, however, they have been turning to individuals for more funding.

A professor at Harvard Business School, Josh Lerner, says that private equity at one time was much more restrained in sidestepping retail investors.

Said Mr. Lerner, “If we’re going to end up with an industry that is dominated by hot money flowing into the sectors that are the most overheated flavors of the moment, it probably doesn’t augur well for the kinds of returns private equity is going to deliver.”

This new filing will make KKR the firm with the lowest minimum requirement for investment. Altegris Advisors LLC will manage the fund, investing at least 70% of its assets in private equity funds and businesses run by KKR. To avoid legal obstacles, KKR has structured its new product in such a way as to navigate regulatory challenges by allowing a third party to manage.

A 1.2% annual management fee will be charged by the fund, and pending regulatory approval, it will offer shares for as little as $10 each until it has raised $25 million for its initial closing.

KKR Continues Energy Infrastructure Expansion

Hong Kong

One of KKR’s Asia offices is located in Hong Kong. IMG: via Shutterstock

KKR, the private equity and global investment company founded by Henry Kravis, George Roberts, and Jerome Kohlberg in 1976, is no stranger to the energy and infrastructure sectors. For the past thirty years, the company has invested in global energy opportunities—and it’s not slowing down anytime soon.

Recently, KKR announced that it would be continuing the investment trend by expanding its global energy and infrastructure business in Asia by appointing Tony Schultz and Ash Upadhyaya to lead the charge.

“KKR aims to create a unique offering in the energy, infrastructure and natural resources market, and part of that comes from combining our local geographic knowledge with industry expertise,” said Joe Bae, who heads KKR Asia, and Mark Lipschultz, who is Global Head of Energy & Infrastructure. “We are very pleased to have Tony and Ash leading this effort in Asia.”

Schultz and Upadhyaya will focus their efforts on energy, resources, and infrastructure in Australia and Asia. Their goals will include continue building up the team in Asia Pacific, finding new global metals and mining opportunities, and providing flexibility in capital and solutions, according to Justin Reizes of KKR Australia.

Tony Schultz was formerly Managing Director at Sydney’s EIG. While there, he focused specifically on energy, metals, and mining investments in Asia Pacific—making him very well suited to his new post at KKR. Ash Upadhyaya has been with KKR since 2011, previously working as a Director on KKR’s Energy & Infrastructure team in the U.S. Both men bring a huge amount of knowledge about the sector to their new positions.

Hillary Clinton is Taking Over Private Equity

Hillary Clinton

IMG: Alan Freed/ Shutterstock.com

Even though Hillary Clinton is no longer the Secretary of State, she is still getting her hours in around the country. This time, it’s in private equity.

Clinton recently spoke at a private equity event in California with about 400 people in attendance. Here she answered questions from KKR co-founder, Henry Kravis on politics, business and more. Last year, KKR partnered with Clinton by creating an infrastructure improvement plan as part of the Clinton Global Initiative.

More recently, Hillary Clinton is scheduled to speak at the private equity firm the Carlyle Group’s investor conference next month. The moderator of the discussion is the group’s founder, David Rubenstein, who is also a Democrat. Two sources familiar with the event confirmed Clinton’s attendance at the September 9th event in Washington.

At these type of events, she generally does a question-and-answer talk, instead of giving a speech.

According to multiple reports, her speaking fee per event is about $200,000. Bill Clinton’s highest paying speaking event after his presidency brought in $750,000 at a the telecom company Ericsson in Hong Kong.

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